Venture capital funding comeback could mean better times

Though as chastened and gun-shy as the rest of the country, Pittsburgh's venture capital firms are beginning to stage a comeback of sorts -- a return to what was considered normal business in the pre-Internet Bubble days of 2000.

There are signs that venture capital investors are beginning to look outside the bunker.

Venture capital -- the investment dollars start-ups and entrepreneurs must have to realize their dreams -- plays an important factor in the local economy. A return to something like stability in the venture capital world could signal better times ahead for the larger economy, experts say.

Researchers at PricewaterhouseCoopers who track venture capital deals and investments nationally, carved out data on the Pittsburgh metropolitan statistical area for this report.

The findings show that Pittsburgh's venture capital firms invested $124.3 million in new and developing companies in 1998. In 2000, with enthusiasm for the dot-com industry at an all-time high, investments reached $853 million.

Investments plunged to $322 million in 2001, and dropped to $123.5 million for the first three quarters of 2002. Fourth-quarter information is not yet available.

Nationally, venture capital investments stood at $21.6 billion in 1998. They soared to $107.34 billion in 2000. The first three quarters of 2002 totaled $16.9 billion.

"What you have to get your head around is what is really normal. 1999 and 2000 were not normal, nor were they ever," said Kirk Walden, director of venture capital research for PricewaterhouseCoopers. "The fact is that 1997 and 1998 are "normal" years. They're more realistic."

Walden said he expected the market nationally to return to "normal" by the end of this year.

Some local venture capital fund managers agree.

"Everybody's having difficulty raising funds," said Art Boni, managing director at Pittsburgh's Saturn CPP Ventures LP. "Given the environment, the appetites for people who invest in venture funds aren't very high."

But Saturn is on its way to raising an $80 million fund to invest in 20 or so new or developing life sciences companies, Boni said. It hopes to reach its goal by March.

Boni's best estimate is that Pittsburgh's venture capital markets will return to normal by the end of 2003 or inside the first half of 2004.

That's good news for Fred Gohh, who has seen the best and the worst of the bubble here.

When Gohh joined the founders of Spinnaker Networks, he watched with excitement as the company, formed in Pittsburgh in December 1999, attracted $20 million from venture capital firms by the following March. The high-tech start-up grew and grew. Spinnaker became one of the poster children of Pittsburgh's high-tech market.

Then, driven by the idea to start a new company, Gohh left Spinnaker in early 2002 to form Vesper Networks, a company still very literally in the basement. Gohh and his two partners work out of Gohh's Franklin Park home. Though they have recently been promised a $200,000 grant from Pittsburgh's Digital Greenhouse, they have little else but their talent and reputation to go on.

"It's very difficult without a question," Gohh said.

Back during the bubble, Gohh says he watched venture capital firms throw millions Spinnaker's way -- even when the company was just a talented team without a working prototype for its network storage business.

Though a talented team remains essential, Gohh said, nowadays investors want to see a prototype and a customer or two before they'll risk their support.

"They typically go through more historical rounds of funding."

For good reason, adds Alvin J. Catz, of Catz Consulting Associates and president of the Pittsburgh Venture Capital Association's board of directors.

"I would say, looking back, what should have been more troublesome to us, but wasn't ... is that the phenomenon of the time was that making a profit was not something that companies needed to focus on," Catz said.

Start-ups in Internet businesses convinced investors to pump huge amounts into building web pages and web presences, with the promise that profits would eventually arise, once you built a user base.

"I guess we lost sight of the fact that you better generate some profit," Catz said. "You better generate some cash."